The race is on to lead a revival in the lending sector

25 January 2010

The global lending market almost ground to a halt last year and the key to recovery for lenders in 2010 lies in their ability to resurrect loan originations.

Longer term lending prospects are only as secure as the length of lenders’ loan agreements, and a return to loan origination will be the key to the survival of lenders in future.

But with so many unknown market factors in play what will it take to revive loan originations and which players will emerge on the front foot? Will it be new entrants, brokers and entrepreneurs or existing financial powerhouses?

With no track record new entrants to the market may find it difficult to secure funding and gain consumer trust in unknown brands. The high cost of customer acquisition will also undoubtedly be a significant barrier to entry.

Innovators will need to rely heavily on product innovation to differentiate themselves from the competition and gain meaningful market share. But where will this product innovation come from?

We continue to see entrepreneurship, fresh lending concepts, innovative products and business models. This trend looks set to continue as the market diversifies and competition opens up.

Innovation could come from foreign shores where interesting propositions are being developed for import

Further innovation could come from foreign shores where interesting propositions are being developed for import into the UK.

Another sector to watch is brokers. At Target we are seeing the re-emergence of brokers as many enterprising key personnel from lenders branch out on their own. Could this provide the spark that reignites the originations market?

Existing players will have the advantage of proven customer performance records and lower costs.

But in the new world many players are likely to become more cautious with their lending - especially as the impact of the Consumer Credit Directive and Mortgage Market Review kicks in. Gone are the days when lenders lent freely. In the new world the origination market will be less about quantity and more about quality.

Lending decisions will be more stringent and time-consuming as risk-averse lenders revert to a more manual and measured underwriting process.

So where will this leave automated valuation models? Will they still be fit for purpose or will we see them replaced with more accurate full valuations? Some lenders might even want to use AVMs to complement full valuations.

But whether it’s entrants, individual brokers, phoenix firms rising from the recessionary ashes or existing players that emerge to lead a lending revival one thing is certain - the biggest issue facing them remains where to secure funding, especially in relation to managing risk and arrears.

That, and the need to dust off neglected front end IT systems and processes to reflect the latest market demands and legislation - a topic I plan to examine in more detail in my next column.

How these challenges will be overcome only time will tell. But if chancellor Alistair Darling is to realise his aspiration of a more competitive and diverse financial market-origination must be an integral part of the lending business plan.

GERAINT CHAMBERLAIN
HEAD OF CONSULTANCY
TARGET GROUP

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